Incorporation may not have been on your mind when you started your business, but at some point, you’re going to have to consider it. Even if you’re sitting there thinking that your business isn’t large enough to incorporate, you could be wrong; incorporation might still be for you.

Incorporation isn’t only for big business. In fact, businesses of all sizes can incorporate, and that includes entrepreneurs who are working solely for themselves. If that’s you, it’s possible you think that keeping your business as a sole proprietorship makes the most sense. However, as time goes on, you may realize that you have plenty of reasons to incorporate your business.

Many small business owners don’t incorporate their business for the simple fact that they don’t really understand what incorporation is. Unfortunately, by not incorporating, they may be limiting themselves and what they can do as a business.

Incorporating a business means designating the business as its own entity that can be recognized as such by the state. It is the legal entity of your business, which separates you from it. Instead of legally connecting you, as the business owner, with the business, it is separated and becomes its own legal entity, with its own finances, debt, credit, and more.

It’s important to learn about incorporating your business to understand if it’s the right move for you. Even if it’s not right currently, you’ll want to revisit the idea from time to time to reevaluate whether it’s time for you to move forward or not.

When is the Right Time?

As you consider whether to incorporate your business or not, you’ll want to pay attention to certain areas that will help you determine when the right time for incorporation is. Focus on these things to know if it’s the right time:

The money that your business makes

The two different types of corporations, S corps and C corps, are taxed differently than sole proprietorships, and the difference can be very beneficial. S corps pay taxes on their business profits, while C corps pay corporate taxes on profits and the owner pays income tax on the dividends they make. However, as a sole proprietor, owners pay income tax and self-employment tax on the profits. This means that businesses making over $60,000 a year could have a large financial benefit from incorporation.

The amount of legal protection your business needs

Keep in mind that if your business is a sole proprietorship, you and your business are considered the same entity, and all of your assets are the same. This means that any legal action taken against your business is also being taken against you. Anything that your business owes due to legal action is something that you owe.

When you incorporate your business, you are personally released from being held liable for legal action against your business. As you consider whether incorporation is right for you, think about how much legal protection you need. If your business is high-risk for potential legal troubles, it’s probably a good idea to separate yourself legally from it by incorporating.

If your business needs credit

Incorporation sets your business apart as its own legal entity. This means that it will have its own credit. If you have any reasons that you might want your business to have separate credit, you will want to incorporate. By giving your business its own credit, you’ll be able to open business credit cards, apply for business loans, and establish payment terms with your vendors. This separates your business’ financial dealings from your own, preventing your credit from affecting your business’ credit, and vice versa.

Your business goals/vision

Consider where you are headed with your business. While there are tons of things to keep you focused on the day-to-day, you should always have a guiding vision to keep you moving forward with your business. Depending on your goals, you might want to incorporate.

Incorporation will be necessary if you plan on selling your business down the road, if you want to find investors for your business, if you want to work with certain companies, or if you need to legally brand your business.

If you need to hire employees

When your business starts out, you might be working on your own for a while. However, if your business growth requires that you hire employees, it may be time to incorporate. When hiring people, the employer becomes responsible for the employee’s actions. If the employee’s actions lead to any legal trouble, this can become very problematic for business owners whose business isn’t incorporated. This is because, without incorporation, the owner and the business are intertwined and viewed as one entity. Any legal issues the employee has fall back on the owner, personally. With incorporation, the business is held separate from the owner.

North Carolina’s Process

Business owners in North Carolina can incorporate their businesses with ease and efficiency. By following these steps, you can incorporate your business to separate yourself and create a new legal entity:

Pick a company name

When incorporating, you will get to name your corporation. Pick a name that is not already on file in North Carolina, followed by incorporated, company, corporation, or limited. Send in the “Application to reserve a business entity name” application with a $30 filing fee.

Articles of Incorporation

After sending in your name, file the Articles of Incorporation with the North Carolina secretary of state. Make sure your articles contain the new company name, address, the number of shares the corporation can issue, names and addresses of incorporators, and the date. Make sure and pay the $125 filing fee to expedite the process.

Choose registered agent

Choose a registered agent for your company who will agree to accept any legal papers on behalf of the company in the case that it is sued. You can choose someone who resides in North Carolina or is just authorized to do business there.

Create bylaws

Write out your bylaws, which is a corporate document of rules for running the corporation. Having clear bylaws isn’t a legal matter and isn’t necessary for successful filing, however, they can be very useful when putting together a corporation with various moving parts.

Choose directors, hold a meeting

The incorporator will need to choose a handful of directors to serve on the board until the first meeting of shareholders happens. The incorporator will sign an inspector’s statement that contains the names and addresses of the first directors.

File report

Annual reports must be filed with the North Carolina Secretary of State by the due date. With these reports, you can file your corporation’s income and franchise tax return.

Get an EIN

Your corporation should receive a federal employer identification number, known as the EIN. Get one through the online application on the IRS website.

Wrapping Up and Final Tips

As a business owner, the time for incorporation may come. Taking inventory of various elements of your business can help you determine whether you’re ready to take the step or not. Paying attention to your business goals, revenue, taxes, various legalities, and if it’s time to hire employees, will give you the insight you need in regards to incorporation.

Business incorporation can be a great decision if you want to get investors or sell your business down the road. It’s also an important move if you work in an industry that has a high likelihood of legal troubles. Incorporation separates you from your business and makes it into its own legal entity, freeing you from a number of negative consequences that could arise down the road.

When you’re considering incorporation, renting a coworking space could be your next best step. They are a low-cost option for a workspace, allowing you to create connections and network with other professionals in order to grow your business. The transition period between sole proprietorship and incorporation can be stressful, so finding a comfortable and affordable place to work and connect can provide you with exactly what you need as your business evolves. If you’re interested in the amazing benefits of Blue Mind Coworking or would like to learn more about our mission, click here.